Although President Trump calls home ownership “ [the] In his speech at the World Economic Forum in Davos on January 21 (1), he avoided mentioning a widely anticipated plan that would allow Americans to withdraw savings from their 401(k) retirement accounts to purchase new homes.
Rather than push for 401(k) plans, Trump has touted other initiatives, including telling government-sponsored Fannie Mae and Freddie Mac to snap up $2,000 worth of billion in mortgage bonds to lower the cost of fixed-rate loans (2), signed an executive order “prohibiting large institutional investors from purchasing single-family homes” (3), and suggested possible changes to the law regarding depreciation tax deductions, noting that businesses would be eligible for such benefits when purchasing homes, while individual buyers would not be eligible (4).
Trump also once again called on Congress to cap credit card interest rates at 10% for one year (5). The directive comes after Trump called credit card debt “one of the biggest obstacles to saving for a down payment.” However, it’s unclear if or when any of the above moves will actually take effect.
However, such moves come as the United States heads into the midterm elections, with a growing number of Trump voters joining the president’s critics in blaming him and his administration for the country’s ongoing affordability crisis (6).
The real estate market, in particular, has been suppressed by high prices and low inventory in recent years. A report from the National Association of Realtors (NAR) shows that first-time homebuyers will make up just 21% of the market by 2025, the lowest level in 44 years (7). During the same period, their median age also nearly doubled, reaching an all-time high of 40 years. The report also pointed out that the median down payment for all buyers was 19%, with the highest down payment ratio for first-time buyers being 10%, a 36-year high.
Still, more details about the proposed 401(k) housing affordability plan never materialized at Davos, although Trump adviser and National Economic Council director Kevin Hassett previously told Fox Business Channel (8) that “the president will present his final plan in Davos.”
So as Americans wait to learn more details, some experts are already warning that such a real estate strategy could prove to be a house of cards for your long-term finances.
One glaring issue many people have with the anticipated Trump 401(k) housing plan is that you could theoretically withdraw funds from your 401(k) for a home down payment. But making a withdrawal before age 59 1/2 usually results in a 10% penalty and other possible fees.
Even if you’re able to avoid penalties and potential fees, there’s still the question of how much compound interest you’ll lose on the funds you withdraw. For example, financial and retirement firm Francis calculated that a young person who withdraws just $10,000 from a 401(k) today could lose more than $80,000, while they could earn more than $80,000 compounded over the next 30 years (9).
“They want you to raid your retirement account, but also want to pretend you’re replacing it by transferring home equity,” financial expert Michael Ryan told Newsweek (10). “It’s just that home equity and stock market growth are not the same thing. It looks like you’re solving the problem, but you’re actually making the problem worse.”
Plus, as Redfin chief economist Daryl Fairweather explained to the BBC, another risk of sacrificing part of your 401(k) for a real estate down payment is that the home itself could depreciate in value over time, dealing a bigger hit to your overall equity (11).
Meanwhile, financial planner Uchechi Kalu explains that even if you do get a down payment from your 401(k), it’s just the beginning for many potential buyers (12). “When you add in a mortgage, and you add in expenses like child care and student loan repayments,” she said, “buying a home becomes impossible.”
Another concern stems from the fact that congressional studies show that only about 54% of Americans have any type of retirement savings account, including a 401(k) (13).
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As a result, Jason Richardson, senior director of research at the National Community Reinvestment Alliance, told the BBC that Trump’s 401(k) strategy “rather than a targeted aid program for people who need help with down payments, it provides more purchasing power to people who already have substantial retirement savings, which may only drive up home prices further.”
NAR Executive Vice President Shannon McGahn warns(7), “Delaying or denying homeownership at age 40 (rather than age 30) could mean losing approximately $150,000 in equity in a typical entry home.”
So the National Association of Realtors is instead calling for more policies that “help free up existing inventory, drive more new home construction, streamline local zoning and permitting, and modernize construction methods to build more homes faster and cheaper” — all of which can not only help more buyers get into the market, but get them there faster.
No matter which side you’re on, it’s important to remember that changing the rules for 401(k) withdrawals involves changes to tax laws and requires congressional approval. As the Wall Street Journal noted(14), “This could be an uphill climb for a deeply divided Congress.”
Time will tell whether Trump’s 401(k) housing affordability plan is actually announced and implemented — including approved by Congress — or whether it goes the way of his vanished 50-year mortgage plan. Until then, the best way to lay the groundwork for a future home purchase is to follow proven strategies and prudent savings techniques that have helped many others achieve the same goal.
First (15), experts recommend putting down payment savings in a “checking, regular savings, or high-yield savings account,” or “a cash-like investment, such as a money market fund or certificate of deposit, that matures before you expect to need the funds.”
Sometimes you can also withdraw money from an IRA or Roth IRA for free, but you still have the same problem as a 401(k) in terms of compounding losses on cash withdrawals.
Meanwhile, Ramsey Solutions likes the idea of a money market savings account to store cash for a down payment, suggesting that setting a dollar goal for a down payment — and then working toward that amount in a “monthly savings goal” — can make the process feel less daunting (16). Additionally, Ramsey Solutions notes that if your 20% down payment goal is realistic, it will help you avoid the need for private mortgage insurance.
Regardless, Ramsey Solutions also warns against “expensive FHA, VA, and USDA loans that scam you” and against using retirement savings to purchase a home, warning that such a move will “hinder the long-term growth of your retirement savings—costing you hundreds of thousands of dollars in retirement.”
As financial planner Chris Kampitsis shared with CNBC (17), “If you know you’re going to want to invest in real estate in a few years, you probably shouldn’t spend all your savings [in] Your 401(k). “
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Business Insider (1); Yahoo Finance (2); Realtors (3); CNBC (4, 17); U.S. News (5); Politics (6); National Association of Realtors (7); Fox Business (8); Francis (9); Newsweek (10); BBC (11); Bloomberg (12); Congressional Network (13); Wall Street Journal (14); Fidelity (15); Ramsay Solutions (16).
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.
